Industry Market Trends

Manufacturing Growth Decelerates in May

Jun 07, 2012

U.S. manufacturing continued to expand through May, although the industry grew at a slower pace than in recent months due to a slowdown in production and a decrease in inventories.

Business activity in the United States manufacturing sector posted modest growth in May, continuing the trend of relatively steady expansion, albeit at a decelerated pace from the previous month. Despite the slowdown, the outlook for manufacturers remains positive, with demand continuing to climb and sales showing steady improvement over the first five months of the year.

According to the Institute for Supply Management's (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the 34th consecutive month in May, reflecting overall growth in the U.S. economy, which grew for the 36th consecutive month.

The ISM purchasing managers' index (PMI), a key monthly gauge of the factory sector, dropped to 53.5 last month, down from 54.8 in April and roughly in line with the 53.4 reading in March. Readings above 50 indicate overall growth for the industry, meaning that manufacturing activity continued to increase in May, but at a slower rate. The latest PMI reading remains above the 12-month average of 53.1.

"Manufacturing, which has been a bright spot since the economic expansion began three years ago, may be starting to cool," Bloomberg News notes. "While gains in auto sales are underpinning factory growth, the industry may become strained by stagnation in Europe's economy, U.S. fiscal concerns and less corporate investment."

While a slowdown was expected in May, the rate of deceleration came as a surprise to analysts. Economists surveyed by MarketWatch expected a reading of 54 for the month.

Orders remained strong, however, with the ISM's new orders index climbing to 60.1 in May, up from 58.2 in April and marking the highest level since April 2011. It also represented the 37th consecutive month of growth in demand for products and services.

The steepest decline in May was in output, as the production index fell to 55.6 from 61 in April. Exports dropped from 59 in April to 53.5 in May, while the backlog of orders fell to 47 from 49.5 the prior month. Manufacturers saw pricing pressures plunge, according to the latest reading, with the prices index dropping from 61 in April to 47.5, the first time manufacturing has experienced falling prices since December 2011.

The inventory index decreased to a five-month low of 46 from 48.5 in April. This was a key factor in the overall decline in last month's PMI, Bradley Holcomb, head of the ISM's survey committee, told MarketWatch.

In addition, the employment index posted a slight decline last month, falling to 56.9 from 57.3 in April. The U.S. labor market added 12,000 manufacturing jobs last month, up from 9,000 in April, but still well below the 41,000 average per month during the first quarter of 2012.

"The jobs report for May is strong evidence that the U.S. economy can't entirely remain an island in a sea of troubles," Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted in an analysis of the ISM report. "Nonetheless, the fact that U.S. manufacturing has now had positive job growth in all but two months since January 2010 is a good sign for the capacity of the factory sector to provide at least some support for a stumbling U.S. economy, even if manufacturing cannot completely escape the growing risk of a global recession."

Thirteen of the 18 industries tracked by the ISM reported growth last month: nonmetallic mineral products; furniture and related products; apparel, leather and allied products; miscellaneous manufacturing; primary metals; electrical equipment, appliances and components; fabricated metal products; machinery; textile mills; paper products; computer and electronic products; printing and related support activities; and chemical products.

Meanwhile, four industries reported contraction in May: plastics and rubber products; petroleum and coal products; food, beverage and tobacco products; and transportation equipment.

Looking ahead, concerns continue to mount over turbulent conditions in international markets. An ongoing financial crisis in Europe and sluggish performance in Asian economies may have a ripple effect on U.S. manufacturing.

"Around the world, manufacturing is struggling. China led a slowdown in manufacturing across Asia that adds risks for the global economy as Europe's sovereign-debt crisis roils markets," Bloomberg News explains. "At the same time, manufacturers are bracing for weaker demand from Europe, where an economic slump showed signs of deepening after Greece failed to form a government after May 6 elections and Spain struggles to clean up banks amid recession and unemployment exceeding 20 percent."